Callahan: The Math Behind Your Labor Rate 

Jan. 16, 2024
A common-sense approach to evaluating and raising your auto repair shop's labor rate.  

We often hear, “Raise your labor rate,” yet owners resist this and respond with excuses about our “unique” market being unable to support the higher charge. Says who? Do you have proof, or is that your mind’s itty bitty snitty committee talking because you don’t value your and your staff’s talent? That self-doubt stops today!

 

Reviewing Your Labor Rate 

First, schedule 30 minutes per week to work on your business (that’s six minutes each day for a 5-day work week). No distractions or interruptions. Set a timer to lessen the anxiety you’ll feel when you think about locking yourself away for that long. Fire, flood, or blood are the only reasons to interrupt this scheduled time. Your business will survive. Seriously. If you’re a solo shop, you may schedule time outside your regular business hours. You can find time.

What will you do with this time? I’m glad you asked! Let’s take a close look at your labor rate!

Many repair shops calculate their posted labor rate by guessing. What? Let’s fix that. Restaurants often price their menu by ensuring food costs hover at 30%. Let’s try that for your labor rate. (If you’re hourly, find your billed hour rate by dividing what you paid by the number of hours produced in that period.)

At Wilson’s Auto, technician Nancy makes $35 per hour. The loaded cost is $49 (Using a 1.4 factor to cover taxes, insurance, etc.).

Service advisor Ann, who serves three technicians, makes $30 per hour, or $42 loaded.

Nancy’s $49 + 1/3 of Ann’s pay of $14, rounded up for simplicity = $63.

One billed hour costs $63 without utilities, rent, technology fees, fixed expenses, and your pay. Using the restaurant method (Cost/GP% = Rate), your effective labor rate (ELR) needs to be $210 ($63/0.3 = $210). Assuming you’re a rockstar operator and collect 90% of your door rate, your posted labor rate must be $233.33.

I can hear you shouting, “What? There’s no way!” I was not too fond of it either, but the math doesn’t lie.

Other nerdy math facts. If labor rates were $25 per hour in 1968, and we increased them an average of 4.5% per year, our labor rate would be $281.41! On a 1968 vehicle, not a 2023 that requires more training, tooling, and software.

 

Increase Your Labor Rate Gradually 

You cannot walk in tomorrow and add $75 to your labor rate. That’s a giant shock. You can add $5 to $10 per hour every quarter until you’re at the right price. Likely, nobody notices the change. Consumers don’t ask what your labor rate is unless they don’t feel the value of your service. In the absence of value, there is only price.

Charging what you’re worth takes more than raising the price. It requires working on the customer’s perception of the service they will receive. If the exterior of your shop looks like an episode of "Sandford & Son" or your waiting room makes people worry about touching anything, you were correct; you cannot charge that. Your client needs to feel the value of your expertise because you are an expert. Raising perceived value will often require tidying up your shop, perhaps new uniforms. You are blind to your mess. Look at what high-end dealerships offer for their customer experience. Ask your brutally honest friend or coach. Send pictures to your peer group. Heck, ask me. I want you to be successful. I want to see all of you at conferences and training classes because you and your staff are worth it. Once you raise your prices, the shops around you will too! Thanks for raising the industry!

P.S. You will lose customers when you charge what you’re worth. It’s OK. The ones who stay will tell their friends how much they appreciate your expertise and top-notch service. Giving cookies helps with that.